MW Concerns about banks' credit exposure help power latest leg of bond-market rally

By Vivien Lou Chen

The 10-year Treasury yield has broken below 4% intraday for four straight sessions, and recently touched its lowest level in six months

Questions are being raised about whether the benchmark 10-year Treasury yield can avoid a sustainable break below the key level of 4%.

The 10-year Treasury yield briefly fell to its lowest intraday level since April on Friday, as traders assessed the potential for a deeper push below 4% on any further fallout from bad loans in the banking industry.

The benchmark yield BX:TMUBMUSD10Y dropped to a six-month low of 3.93% just after 3 a.m. Eastern time and remained near that level for hours, before climbing toward 4% on light selling of the 10-year note as the New York trading session progressed.

The widely followed yield has slipped below 4% on an intraday basis for four straight sessions, raising questions about where it could go from here. Concerns about banks' credit exposure helped drive yields lower this week, although signs that these issues will be contained helped fuel a bit of a reversal on Friday. Bond yields move inversely with prices.

A 4% 10-year yield tends to send a positive signal about the health of the U.S. economy, so a sustainable break below this mark would likely point to heightened worries about a slowdown or the risk of a recession. On Thursday, Zions Bancorp $(ZION)$ said it would take a $60 million provision for credit losses when it reports third-quarter earnings results on Oct. 20, and indicated that it has initiated legal action against two borrowers.

See also: Banks' credit 'cockroaches' are spooking the stock market. Here's what investors need to know.

The 10-year yield has been on a mostly downward trend since late May, when it briefly topped 4.6%, and its underlying government note has largely rallied since then.

Signs of a weakening labor market have helped power the rally seen in recent months, as have expectations that the Federal Reserve will continue to cut interest rates in 2025. Fed-funds futures traders on Friday boosted the chances that Fed officials will deliver a total of 50 basis points in interest-rate cuts by December to 92%, versus 88.2% on Thursday, according to the CME FedWatch Tool.

Other issues have contributed to the rally as well, including the ongoing government shutdown, which began on Oct. 1, as well as escalating U.S.-China trade tensions.

The prospect of slowing economic growth, along with more Fed rate cuts by year-end, sent the policy-sensitive 2-year Treasury yield BX:TMUBMUSD02Y down to 3.4% on Thursday - its lowest closing level in three years - and the 10-year yield down to a one-year low near 3.98%. From Oct. 1 through Thursday's session, the short-dated yield has fallen at a faster pace than the 10-year yield. The combination of these two moves has produced a Treasury curve that is less steep than it was in late August and early September, after Fed Chair Jerome Powell opened the door to the possibility of near-term rate cuts and as traders stuck by expectations for longer-term, persistent inflation.

As for what was driving trading early Friday, Chris Low, chief economist at FHN Financial in New York, said traders were "nervous" in part because of what Zions's legal filing implies about other lenders' exposures. In a note, Low wrote that "even if this loss proves to be a one-off, credit will tighten as senior loan officers across the industry tighten scrutiny to prevent being dragged into the mess. It is one more reason the Fed should continue cutting rates."

Meanwhile, in a somewhat worrisome sign about the U.S. economic outlook, a market-based gauge of future price gains known as the 5-year breakeven inflation rate fell 4 basis points to 2.29%, according to FactSet. A decline in inflation expectations tends to be associated with the possibility of a weaker economy, which would theoretically take the edge off price pressures.

Comments from President Trump, made in an interview with Fox Business's Maria Bartiromo, that his administration's proposed 100% additional tariffs on Chinese goods were "not sustainable" were helping to push yields higher on Friday, while also driving a rebound in stocks after a big drop in the futures market overnight. The 10-year yield was up by 3 basis points to almost 4% in recent trade, as U.S. stocks DJIA SPX COMP headed higher during the afternoon.

Derek Tang, an economist at Monetary Policy Analytics in Washington, D.C., said his view is that the banking industry's current issues seem to be "pretty well contained" and shouldn't become "a full-blown crisis." Upward pressure on inflation and pressure to finance the U.S. deficit should result in the market "clearing with higher yields over time."

-Vivien Lou Chen

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October 17, 2025 13:32 ET (17:32 GMT)

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